Wells and Associates has EBIT of $67,500. Interest costs are $22,500, and the firm has 15,000 shares

Question:

Wells and Associates has EBIT of $67,500. Interest costs are $22,500, and the firm has 15,000 shares of common stock outstanding. Assume a 40% tax rate.

a. Use the degree of financial leverage (DFL) formula to calculate the DFL for the firm.

b. Using a set of EBIT–EPS axes, plot Wells and Associates’ financing plan.

c. If the firm also has 1,000 shares of preferred stock paying a $6.00 annual dividend per share, what is the DFL?

d. Plot the financing plan, including the 1,000 shares of $6.00 preferred stock, on the axes used in part b.

e. Briefly discuss the graph of the two financing plans.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...